Degrading Power Sector - Watts Not Happening

By M H Ahssan

With demand rising by the day, only a drastic restructuring will resolve India’s power problem.

Imagine this. It is 2029. Anil Ambani, 70, is headed for his office on the 100th floor of one of the world’s highest buildings in Navi Mumbai on a high-speed elevator. Ninety-five per cent of the cars in the country run on rechargeable batteries in an attempt to move towards greener living, so all fuel stations have been replaced by rechargeable battery stations. Meanwhile, a lot of people have abandoned personal transportation in favour of the metro rail, which now covers most cities.

Households have replaced their human help with robots (JustDoIts, manufactured by Nike, which has diversified its business) that do all the work with a smile on their faces. When they look exhausted, they are plugged to a recharge outlet, much like cellphones are today.

Parliament, tired of meeting in the dull round building that houses it several times a year, has reduced the actual physical meeting to once a year. Rest of the business is conducted via monthly virtual meetings through a state-of-the-art video conferencing network.

Life is progressing smoothly, until....
The country witnesses a sudden 48-hour power failure. The creaking machinery of the different state electricity boards (SEBs) has jointly broken down, after years of managing the crushing load on ever decrepit infrastructure.

Ambani is stuck for two days in his high-speed lift. Cars that have run out of battery grind to a halt. The metro trains, crammed with people, stop running.

Rahul Gandhi, India’s 59-year-old youngest-ever bachelor Prime Minister hurriedly summons an emergency cabinet meeting in the Parliament House because the video-conferencing facility cannot work sans power. But on arriving there, he finds himself alone. His cabinet colleagues are stuck at different locations because of the power failure.

This is a future that stares us in the face if Prime Minister Manmohan Singh’s new government cannot fix the power problem that has been getting worse each year for the past 10 years. Demand is rising as expected in a developing economy, but supply is falling far behind.

Without the ability to sell directly to consumers across the country — or Open Access, in the industry parlance — the private sector is still shying away from investing heavily in power projects. India’s peak power shortage was around 11 per cent a few years ago. It is estimated to go up to around 13 per cent currently — despite all the reforms that have taken place. And this 13 per cent refers to the gap between the peak power demand from consumers who have access to electricity and the generating capacity. It does reflect the fact that actual generation is often way lower than installed capacity for many reasons — fuel shortages, breakdowns in old plants, et al.

And it does not reflect the fact that a lot of the power generated also does not reach the real, paying consumer because it leaks away in the transmission and distribution (T&D) system. And it certainly does not account for the fact that peak demand would have been vastly higher if the entire country had access to electricity.

Despite 18 years of power reforms, over 40 per cent of the country’s population is without electricity, 60 per cent of Indian firms and a large percentage of homes rely on captive or back-up generation, according to a World Bank report. As former power secretary E.A.S. Sarma puts it: “In the perception of the consumer, power should be available cheap and the quality and customer service should improve whereas, in reality, it has been otherwise.”

And things — if experts are to be believed — may get a lot worse before they begin to get any better. In 2009-10 alone, the gap between the power demand and availability is forecast to be 14,978 MW against the actual deficit of 13,024 MW in 2008-09. This is despite an anticipated capacity addition in 2009 of 12,000 MW — the highest ever in a single year. (Slightly over 20,000 MW was added during the entire 10th Five-Year Plan). “So what is happening is that you are not improving, you are not even staying where you are but in fact you have deteriorated,” says Gajendra Haldea, advisor to the deputy chairman of the Planning Commission.

Many states are already in a crisis situation. Haryana, for instance — where the badly planned development of suburb Gurgaon has given rise to a never-anticipated power demand — has a 60 per cent shortage at peak time. States such as Uttar Pradesh (peak deficit 22 per cent) and Maharashtra (peak deficit 23 per cent) are not much better off. In fact, 10 out of 28 states are expected to have a deficit of over 20 per cent in their power needs in 2009-10.

But what is even more alarming is that if things continue the way they are, we will all be plunged into darkness by 2012 (ironically the year that Ministry of Power is aiming for “power for all”). According to the latest Electric Power Survey, India is expected to have a peak electricity demand of almost 50 per cent over what it did in 2008-09 (152,746 MW by 2011-12 against just over 100,000 MW in 2008-09). So what caused the crisis and what is the solution?

1970s and 1980s: The Genesis Of The Crisis
Way back in the 1970s, the governments in the states started offering free power to the agricultural sector and a few other consumers. Not only was the power given away free, no metering was done to keep track of power being given away. Lack of metering led to a situation where the SEBs lost track of how much power was being given away free and how much was being stolen.

Soon, the losses of the SEBs began to mount. Tariffs when charged were way below what was needed to cover costs. There was no need to meet the costs because the law, till the mid-1980s, did not require the boards to earn a minimum rate of return. Pilferage became rampant as the penalties were lax. As losses mounted, SEBs stopped investing in both generation, T&D capacities and modernisation.

1990s: A Serious But Badly Thought Out Attempt At Reform
In 1991, realising that the SEBs were not adding generating capacity, India opened up its power sector to private and foreign investment and invited independent power producers (IPPs) to come and set up generating units in the country. Close to 200 MOUs with proposed investors were signed to produce over 50,000 MW. Seven of these projects were backed by counter guarantees from the Centre. The SEBs had the primary responsibility to pay and if they did not, the Centre would pay. Despite this, nothing much happened.

Most of the projects failed to take off as producers of power realised that the buyers of power (the SEBs) were largely bankrupt and lacked the means to pay for what they would buy. Out of 50,000 MW, less than 4,000 MW actually materialised.

Late 1990s And Early 2000S — Reforms in Distribution
In the late 1990s, pushed by the World Bank and Department for International Development, four states — Orissa, Haryana, Rajasthan and Andhra Pradesh — tried various reform models. While some progress was made, none of the experiments could be called really successful. Andhra Pradesh separated its generation, transmission and distribution way back then, but did not privatise anything.

Orissa tried to privatise, but it made two mistakes. One, it replaced the public monopoly with private ones. Two, it handed over a system that was much worse than the private firms had bargained for. T&D losses in the state remain really high today (36-42 per cent) — one indication that matters have not improved.

In 2001, the Centre agreed to a one-time write-off of SEB dues to the tune of Rs 41,473 crore and also started telling the states to reform the boards or privatise them. Delhi tried out a privatisation experiment in 2002 with its distribution process. As in Orissa, instead of true competition, specific areas were carved out and handed over to private monopolies. Delhi is considered a partial success by some reformers because T&D losses have halved though power outages are still frequent in different areas. According to Lalit Jalan, chief executive officer and whole-time director, Reliance Infrastructure, which won two of the three distribution areas being privatised in Delhi, T&D losses have come down from 50-52 per cent at the time of taking over to 20-22 per cent currently. But consumers complain that power outages still happen frequently, despite over seven years of privatisation.

2003: The Electricity Act And The Main Culprits
As the situation went from bad to worse, the Centre realised that it needed to get the states to change their ways through legislation. The Electricity Act — drafted in 2000 and turned into a law in 2003 — mandated that the states introduce competition and allow consumers to choose their own supplier. This, it was felt, would help bring in enough private participation — into generation and distribution. However, none of the states have moved in this direction. Some of the states have — under pressure from the Centre — separated their generation, transmission and distribution in an attempt to move towards corporatisation, but no real reform has been done. T.L. Sankar, non-executive chairman of KSK Power Venture and former chairman of Andhra SEB, blames this on the failure to achieve quick results as a result of reforms. But he hits the nail on the head when he says “employee opposition” is one of the main problems. Harry Dhaul, director-general of IPPAI, says, “Vested interests in the states are trying to harness and capture resources in the garb of consumer interest.” Sarma says that the resistance is on account of “corruption on the distribution side, and as unbundling will permanently deprive some employees of their opportunity to work on the distribution side”. Even as this story was being written, Uttar Pradesh power employees were busy staging demonstrations to protest against the handing over of power distribution for the next 20 years in the urban areas of Agra and Kanpur to private sector Torrent Power.

Many states have outright refused to reform their SEBs. Despite the one-time write off, losses of the boards continue to gallop (see ‘Deteriorating Financials’). Power reaching the end user remains in the hands of the state-owned utilities; private producers, even if they generate, cannot get paid for the power they supply to SEBs and cannot access end users directly. B.K. Chaturvedi, member, Planning Commission, says the states are reluctant to privatise distribution because “power is a highly political matter in the states” (see interview on page 33).

2006: Ultra-Mega Power Projects
Aware of the crisis that was steadily brewing, the government in 2006 decided to set up ultra-mega power projects (projects with 4,000 MW capacity) and these were granted to the private sector through a competitive bidding process.

However, financing of the projects (cost of close to Rs 18,000 crore each) is proving to be a challenge. Moreover, the power from these projects is only likely to be available from 2011-12 onwards.

“We need to get over this infatuation with ultra mega power plants. Fix distribution today. Larger towns should be handed over to the private sector using some version of the Delhi model,” says Partha Mukhopadhyay, economist with Centre for Policy Research. Not everyone agrees that the Delhi model is the ideal way to go, but many agree that it is better than doing absolutely nothing. Raaj Kumar, chief executive officer, (Power) of the GMR group says they are “looking at appropriate opportunities to get into the distribution business”.

According to Haldea, while the mega power plants may alleviate the situation in a temporary manner, only a drastic restructuring of the power sector will resolve India’s problem.

2009: Where We Are Today And The Way Forward
States are not keen to allow consumers to choose their source of power. On paper, the states have agreed, but in practice they are using different ways to prevent consumers from breaking away. Surplus states are selling power to their state trading entities (who then auction the power in an open market) rather than offering it for open access. Some states — who do not have enough power — clearly do not want suppliers within their states to sell to anyone outside. And some states are charging absurd amounts as surcharge; so buying power from another supplier becomes unviable or too expensive.

Not only are the states not falling in line, some are actively blocking sale to other states. Haryana — an acutely power deficit state — has waived off surcharges on its consumers and allowed them to get power from outside the state, but the state government says that this has not helped. Haryana recently told the Centre that “some surplus states” are telling “their generators not to supply power directly to consumers in other states”.

As Raaj Kumar points out, without the private sector being able to freely use the open access, nothing much can progress. S.L. Rao, the first central power regulator, says, “Rules framed by the government must be free of uncertainty and arbitrariness.” After all, this is crucial for investors who have taken risks to invest in projects. This should not be compromised, he says.

The Centre is trying hard to convince the states to adopt open access. It is offering incentives — but progress is slow on that front as well. Chaturvedi, who headed a task force on open access, says the basic idea is to incentivise the states. A bit like a carrot-and-stick approach without a stick. If the Centre moves quickly, it could well convince the states to fall in line, especially the power deficit ones.

Some experts argue that more fundamental reforms are needed before power reforms actually move ahead. This is primarily because power remains a subject in the hands of the states and the Centre has limited jurisdiction over it.

Unless some of these drastic and not so drastic steps are taken, the day when life comes to a grinding halt may actually not be as far as you thi-nk. What we described when we started the story was just a figment of imagination. If it turns into reality, we will have only ourselves to blame.